The Evolution of Incentives for Retirement in Italy, 1980–2015

This chapter discusses the labor force participation reversal at older ages over the recent decades and relates it to pension reforms, that were particularly relevant in Italy since the early 1990s. It computes retirement financial incentive measures in the public pension system and shows how these vary by age, year, income and education. It also shows how the incentives system depends on the specific features of the earnings profiles of Italian workers by comparing them with those that would obtain if the earnings profiles were as in the common case considered in this volume.

The aim of this chapter is to explore and try to explain the increases in older Italian men’s labor force participation (LFP) and employment over the past 20 years. This is a general pattern, common to most developed countries around the world, and many factors may have contributed to the recent increases in LFP and employment. These include changes in social security and disability insurance (DI) incentives, improving health and longevity, increasing education, a shift toward less physically demanding jobs, and rising female LFP (combined with the desire for joint retirement among couples). The combination of high public debt and remarkably fast population aging prompted important changes in the Italian social security system. In fact, population aging in Italy poses important challenges to the public pension system for three reasons. First, Italian public debt is particularly high (over 130 percent of GDP), coupled with a particularly low GDP growth experienced in recent years; second, Italy has a low fertility rate, around 1.4 (its population is aging from below); third, Italians’ life expectancy is among the highest in the world and rising (its population is aging from above). Given that the public pension system is basically a pay-as- you-go (PAYG) system, this combination calls for a substantial increase in LFP at all ages (see Brugiavini and Peracchi 2003 and 2007; Brugiavini, Pasini and Weber, 2017). Part of this increase may be obtained by encouraging female LFP (which is still relatively low in Italy compared to the US, the UK, or northern Europe), and part may be achieved by drawing in foreign workers (who compensate for aging from below). But there is no doubt that “aging from above” calls for longer working lives—and the very low average effective retirement ages experienced in Italy until two decades ago suggest there are major gains to be achieved by moving in this direction. In light of these challenges, it is not surprising that the public debate has focused on how to increase the labor supply of workers in the 50 to 65 age group both by changing the incentives to retire and by introducing tighter conditions to be eligible for a public pension. Pension reforms have been implemented over the last three decades (starting in 1992), including a radical reform that was introduced in 2011 to ensure the sustainability of public debt and postponed retirement age—by a wide margin for several workers— without offering an easy transition out of the labor force. In particular, a relatively large number of workers who had agreed on a separation from the firm expecting to shortly retire on a public pension faced the prospect of long-term unemployment.